The Disability Tax Credit

What is it and how is it treated in a Bankruptcy?

The Disability Tax Credit is one of the most misunderstood tax credits available. For most people, they believe that it is a tax refund.

If you are eligible for the Disability Tax Credit, the effect is to provide you with an additional tax credit of $7,341 over and above the basic personal exemption, which is also a tax credit.

The credit is intended for those with severe and prolonged physical or mental impairments. To be eligible, the person must be “markedly restricted” in terms of speaking, hearing, walking, eliminating (bowel or bladder), feeding, dressing or performing mental functions of daily life.

A physician or licensed practitioner must complete and certify the medical section on the application form (Form T2201). In 2005, the Canada Revenue Agency broadened eligibility criteria and added a 10-year retroactive adjustment for those who can prove their impairment has lasted for years. The adjustment is not a refund but just an additional tax credit. It may generate a refund to the extent that you had paid tax in those prior ten years.

However, if you have no taxable income, or didn’t pay any tax during the year, the credit doesn’t help you. And there is no carry-forward of any unused portion of the credit.

But if you have taxable income, it can create a credit that will allow you to pay less tax. In addition to paying less tax, you may be eligible to receive additional increased benefits such as the Child Tax Benefit or GST/HST Credits.

In a bankruptcy, any tax refund that applies for the years prior to and including the year of bankruptcy would be property of the Trustee for the benefit of your creditors. Any refunds generated for future years would be property of the debtor.